Voluntary Surrender of CoR/License by NBFCs for cancellation

The term NBFC stands for Non-Banking Financial Company which is of great importance in India. It fulfills the role of ensuring proper financial financing in the economy. Therefore, the Reserve Bank of India (RBI) is the sole body responsible for the supervision and regulation of NBFCs to ensure the growth of financial institutions. The number of NBFCs has decreased over time due to the cancellation of the NBFC license by RBI due to the voluntary relinquishment of NBFC registration. In addition, failure to meet the requirements of the Net Owned Funds (NOF) criteria is another reason for cancellation. So let’s discuss the Voluntary Surrender of CoR/License by NBFCs.

What is a net-owned fund for NBFC?

The purpose of the term “net owned fund” under sub-section 7(I) of section 45-IA must mean-

• Summary of paid-up share capital and free reserves as shown in the latest balance sheet of the company after deduction
  • Accumulated loss balance
  • Expenditure on deferred income
  • Other intangible assets

• Further reduced by amounts representing
• Investing in shares of such a company
  • Its subsidiaries
  • Companies in the same group
  • All other non-bank financial companies

• Book value of bonds, debentures, outstanding loans, and borrowings (including installment financing and leasing) and deposits at
  • Subsidiaries of such company
  • Companies in the same group if this amount exceeds 10%

Conditions for obtaining NBFC license

Every NBFC (Non-Banking Financial Company) must obtain a license/certificate of registration from RBI before starting any business activity.

Every NBFC has to fulfill the following conditions at the time of registration

NBFC license-

• All business entities are required to register under the provisions of the Companies Act 2013.
• All entities are required to start financial activities under the provisions of the RBI Act of 1934.
• Every business entity must obtain an NBFC license certificate/registration if the financial flow of the business increases and exceeds the limit of 50% of the total assets of the company.
• The company requires a minimum paid-up capital support of Rs two crore as net owned fund.
• In a situation where it is ensured that the company can repay the future and present claims of depositors and has sufficient prospects of earning and the affairs of the company are not detrimental to future or present investors, then the Reserve Bank of India may ask the company to inspect to your records and accounts.

Surrender of NBFC License Registration

There are situations when a company is entitled to surrender NBFC registration. They are as follows:

• NBFC ceases to carry on the business of NBFI (Non-Banking Financial Institution) in India
• NBFC has not fulfilled any condition of the certificate of registration prescribed by law and other conditions prescribed by RBI at the time of issue of the NBFC registration certificate do not meet the conditions stated with the affairs and capital of the company.
• The NBFC does not comply with any instructions issued by the Reserve Bank of India
• The NBFC does not maintain books of accounts per the requirements of any Act or the provisions of the Act or the instructions of the RBI
• The NBFC does not submit its books of account and other relevant documents or offer for inspection purpose
• The NBFC by order made by the Bank under the provisions of this chapter prohibits accepting deposits and this order is valid for at least 3 months.

Effects of Surrender of Registration of NBFC License

• Within 30 days after cancellation of VR apply to RoC, MCA for suitable change of its name and industrial activity code which will not constitute carrying out of financial business.
• Within 30 days of the dissolution of the VR amend its memorandum of association (MoA) by deleting provisions relating to financial business from its main subjects.
• Submit audited financial statements for the next 2 fiscal years to the Reserve Bank within 30 days of the completion of the annual accounts, but not later than 31 December [NBFC-HFC to submit audited financial statements to NHB]

When the company surrenders all its certificates, it will not be able to do business with other non-banking financial institutions. Reserve Bank of India allows registration certificates. Those NBFCs which have surrendered their Reserve Bank of India-approved NBFC registration will be restricted from further business. A non-banking finance company that chooses to forgo NBFC registration as a ‘non-banking finance company’ cannot accept any form of public deposit.

Surrender of registration of NBFCs related powers is provided under Section 45-IA (6) of the Reserve Bank of India Act, 1934, the Reserve Bank will further cancel their certificate of registration of companies that surrender their registration for a non-banking company financial institutions to the Reserve Bank of India.

Companies are not allowed to do business with non-banking financial institutions as mentioned in clause (a) of section 45 of the Reserve Bank of India Act, 1934. NBFCs are now not allowed to engage in business activities listed in banking financial institutions.

Illustration of case law under license of NBFC Registration

Any form of business entity can enter into the money lending business, but it is important to register under the relevant legislation. Supreme Courts in Kaloji Talusappa Gangavathi vs. Khyanagouda and Ors (AIR 1970 SC 1420) observed that to curtail the malpractice of moneylenders and to protect gullible creditors, the administration must enforce such strict restrictions by requiring such person to obtain a license, keep and render accounts and perform other responsibilities. From time to time the courts have rejected money recovery suits brought by unregistered moneylenders who have their moneylending contracts and businesses void for lack of a moneylending license.

Final words

India’s banking sector is facing an unprecedented liquidity crunch following the revelation of a major fraud last year. The contagion effect later spread to other established ones, forcing the Union Government and the Reserve Bank of India to announce special measures to support NBFCs and housing finance companies.